New political macroeconomics and international financial markets: asset pricing and the Asean process of financial integration

This thesis investigates the implications of the ASEAN (Association of South East Asian Nations) process of financial integration for international risk sharing and asset pricing in East Asia. East Asia faces significant macroeconomic challenges posed by the rebalancing of the global economy and through its continued reliance on the US dollar to underpin trade and finance within the region. These challenges have made East Asian economies susceptible to exchange-rate related balance sheet effects arising through volatility in exchange and interest rates (or simply exchange and interest rate risk). Regional financial market integration provides a means with which to reduce the implications of the region's exposure to exchange rate and interest rate risk. However, this will necessitate the improvement of international risk sharing through greater financial regionalism, a political economic process, which in East Asia has been observed to be driven by ASEAN processes. As exchange rate and interest rates are elemental sources of aggregate/macroeconomic risk in region, their dynamics and any means designed to diminish them are expected to drive asset prices across East Asia. On this basis, the thesis analyses how the ASEAN process of financial integration is driving asset returns in East Asia's financial markets. To this end, the thesis utilises new political economic frameworks and asset pricing methods to provide three empirical studies. Each of the empirical study analyses one of three interrelated aspects of regional financial integration: financial integration as an end-state; financial integration as a process, and; financial integration as unification of macroeconomic policies. Accordingly, the thesis tests the following central hypothesis: in the period 1995- 2008, the ASEAN process of financial market integration has significantly influenced intraregional risk sharing in the East Asia region. However, the findings made through the analysis of these three interrelated aspects of financial integration indicate that, ASEAN-led regional financial integration remains a viable means with which to improve international risk sharing within East Asia. Yet, this viability is in decline as it is being usurped by the gains offered though global-based integration. Understanding and measuring the dynamics of the process of financial integration, and its implications for East Asian risk sharing, have direct implications for Asian firms. Thus, the findings made in the thesis are of importance to investors, corporate and investment strategists and for public policy makers. Based on its findings, the thesis identifies the markets in which competitive firms are anticipated to create value by raising capital on the US or Singapore financial markets. Concomitantly, the thesis indicates the markets in which competitive firms are well positioned to exploit the opportunities provided by regional financial integration to create value and to increase their profits over time.